Arun Jaitley proposed rationalising the capital gains regime for sponsors of REITs and InvITs seeking an exit at the time the trusts list their units
Bengaluru: The long wait for the listing of real estate investment trusts (REITs) may finally get over, with the budgetary proposal to rationalize the capital gains regime for sponsors of REITs and infrastructure investment trusts (InvITs) seeking an exit at the time the trusts list their units.
REITs and InvITs are collective investment vehicles that have an important role to revive construction activity and a large quantum of funds are locked up in various completed projects, which need to be released to facilitate new infrastructure projects to take off, finance minister Arun Jaitley said on Saturday.
“I, therefore, propose to rationalize the capital gains regime for the sponsors exiting at the time of listing of the units of REITs and InvITs, subject to payment of securities transaction tax (STT). The rental income of REITs from their own assets will have pass-through facility," said Jaitley.
REITs are proposed as listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and list them as a trust. REITs will also give foreign investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreign investments. The 2014 budget took the first step in encouraging the trusts by providing partial pass-through to them.
Aligning the sponsor or developer with other unit holders and entitling them to capital gains exemption subject to STT is a positive.
“The earlier regime, which required the sponsor to pay capital gains tax on sale of REIT units, disincentivized them from transferring the SPV (retail mall or office) to an REIT," said Ruchir Sinha, co-head (private equity and M&A) at Nishith Desai Associates, a law firm.
The budget speech also proposes pass-through on the rental income from assets held by REITs directly. “This may not be helpful at all since the capital gains tax and stamp duty on transfer of the asset will be huge and hence all the sponsors would be inclined to transfer shares of the SPV (special purpose vehicle) and not the asset directly. Therefore, the possibility of an REIT holding assets directly seems unlikely," said Sinha.
S. Sriniwasan, chief executive officer (CEO) of Kotak Realty Fund, said, “The finance minister has referred to deferment of capital gains tax for sponsor contribution of assets to an REIT and pass-through of rental income, which are tremendous positives."
With some relief with regard to capital gains tax, developers and private equity (PE) firms trying to cash in on their assets in a tepid market may tap into the REIT space, which is valued at $20 billion (around ₹ 1.2 trillion) by some experts.
“Indicators that tax pass-through on REITs will be implemented is welcomed, reference to a rationalization of the CGT (capital gains tax) in the restructuring is welcome as well as the indicator that the STT will apply, as opposed to the DDT (dividend distribution tax). We will await and review the detail, but if the understanding is correct, this has the potential to stimulate the REIT market in India which can release lower-cost capital, increase liquidity in the real estate market and stimulate the next phase of the enhancement of India’s urban infrastructure," said Mike Holland, CEO of Embassy Office Parks, the entity through which global PE fund Blackstone Group Lp and Embassy Property Developments Pvt. Ltd hold many assets.
Blackstone and Embassy Property have lined up an office asset portfolio that is valued at around $2 billion, and may look at an end-2015 date for a possible listing of their REIT.
“Matters like MAT (minimum alternate tax) on exchange of units against shares of SPV have not been answered. Also, the pass-through given for rent to be taxed at the hands of unit holders by deducting TDS (tax deducted at source) on distribution, may create confusions for non-resident unit holders," said Zulfiqar Shivji, international liaison partner and head of transaction advisory services at BDO India Llp.
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